Advantages or Importance of Working Capital
- With the availability of adequate working capital, the regular supply of raw materials can be maintained along with the interpreted production.
- The company can avail cash discount facility on particular amount of purchases to maintain the capital flow. Thus, it also helps in overall cost.
- Getting loans are easy from banks or any other financial institutions (if required) under simple terms and conditions.
- Prompt Payment Policy helps the organization to have a goodwill in all its services
- During depression or emergencies, it is easy to maintain the financial requirements.
- This enables higher returns and helps in additional fund generation for the organization.
- It is easy to have an expansion of the organization after successful obtaining of higher profits.
- It supports in the improvement of morale among the employers and employees in the company.
- It helps in the encouragement of research programme.
- It helps in higher productivity with the precise utilization of assets at each and every step of production.
Disadvantages or Consequences of Inadequate Working Capital
- Without the availability of proper fund, no organization can pay its short-term liabilities. In this context, it has to borrow the amount at thehigher rate of interest.
- The organization will find it difficult to purchase its raw materials in bulk quantities. This leads tonottaking advantage of cash discount.
- As there is aninsufficient amount of working capital, fixed assets could not be utilized This leads to the rate of return on investment falls.
- If there will be the low-level liquidity of the organization, then it might lead to winding up of the organization.
- For any organization, it will be tough to get favorable market conditions to acquire profit or to grasp business opportunities.
- Inadequate working capital leads to lack of utilization of production facilities.
- It might have an impact on the reputation of the organization in the long run.
Disadvantages of Excessive Working Capital
- The excessive purchase may lead to unnecessary losses and waste of capital.
- With the available huge amount of capital, there is a possibility of rate of return goes down.
- Excessive working capital may lead to heavy loss of the firm.
- It will be difficult to maintain cordial relationship with financial organisations like Bank and other firms.
- It is possible to raise the bad debts in huge amount
- Excessive working capital might lead to excessive production that does not matchup with the demand.
Links of Previous Main Topic:-
- Introduction to responsibility accounting
- Introduction to financial management
- Introduction and types of dividend
- Concept of cost of capital
Links of Next Finance Topics:-
- Concepts of working capital
- Advantages or importance of working capital
- Determinants of working capital or factors determining working capital
- Sources of working capital
- Forecasting techniques of working capital
- Test questions working capital
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